Creeping doubts about Abenomics

By Paul Mackintosh - 27/05/13

Abenomics showed its Achilles heel last week, with a 7% slide in the Nikkei, its biggest one-day drop in two years according to Reuters, taking shares down worldwide and ending a trend that had seen Japanese markets rise to their highest levels in over five-and-a-half years, the yen fall to its lowest level in four-and-a-half years, and gratified private equity firms take their Japan portfolio companies to market in a series of profitable exits. And although the triggers were an unexpected drop in Chinese factory output in May and remarks by US Federal Reserve Chairman Ben Bernanke indicating that the US may soon rein in stimulus measures, the correction raises concerns over how elastic Japan’s rebound really is.

After decades of stagnation, the aggressive stimulus measures of the new LDP administration of Shinzo Abe were topped by April’s plan for the Bank of Japan (BoJ) to push US$1.4 trillion in stimulus measures to push citizens and institutions out of government bonds and into growth-friendlier and riskier asset classes such as equities. First-quarter growth in Japan hit 3.5%, and as of March 2013, the Japan Venture Capital Association was predicting a 67% rise in IPOs during the year, according to Bloomberg, with 14 companies announcing listings for 2013 versus only eight in Hong Kong. Carlyle exited its local software investee Broadleaf later that same month through a TSE listing that garnered just over $250 million. Straight after, fellow buyout titan KKR & Co sold off its portfolio asset HR company Intelligence Holdings to local strategic Temp Holdings for $721 million, almost doubling its money in three years.

Now the clouds are obscuring this new rising sun. Of course, one stock market slide is unlikely to bring Abenomics crashing to a halt. But there are already other concerns being raised over the stimulus strategy. The BoJ has been driven to reaffirm its commitment to stimulus amid growing bond market volatility. China has been protesting that the Japanese government’s policy moves, especially the weakening yen, are unfair beggar-your-neighbour measures, and pressure from Beijing, combined with anti-Japanese consumer reaction in China and Korea following the nationalistic comments of the mayor of Osaka, might leave Japanese businesses facing stronger export market headwinds. But above all, concerns persist over whether Abenomics truly promotes the structural reform that Japan’s sclerotic industrial base badly needs. Chinese commentators, such as David Li, Mansfield Freeman professor of economics at Tsinghua University in the Financial Times, have already made this point. Abe’s LDP trusties are hardly natural reformers, and opening the money taps may prove to be no substitute for the kind of deep structural changes that private equity can both benefit from and help bring about.